Introduction
Background
Decision
Comment
Binchuang Resources Co Ltd v Lockwood Group Ltd & Anor(1) is a recent decision of the Court of First Instance of the High Court that considers an application for an order requiring the defendant to make an interim payment prior to trial, on account of the strength of the plaintiff's claim for damages. Such applications appear to be less common in commercial disputes than (for example) personal injury actions. However, as the case demonstrates, in the right commercial dispute, an interim payment application can serve as an alternative to an application for summary judgment (ie, judgment without trial).
The background circumstances are quite detailed. However, in brief, the plaintiff agreed to borrow 40 million yuan from the first defendant pursuant to a loan agreement dated 17 July 2019 (the loan agreement). As security for the loan, the plaintiff pledged a large tranche of shares (the shares) in a listed company in Hong Kong, pursuant to a tripartite agreement between the plaintiff, the first defendant and the second defendant, executed on 8 August 2019. Pursuant to these agreements, the plaintiff would remain as the beneficial owner of the shares, save in an event of default under the loan agreement, and the second defendant would arrange for the safekeeping of the shares in an account with a custodian bank until repayment of the loan.
It appears that, other than a relatively minor sum, the loan was never received by the plaintiff and the shares were transferred by the first defendant to a third party on or about 6 September 2019.
The plaintiff commenced proceedings against the first and second defendants in or about November 2019. As against the first defendant, the plaintiff's claims were based on four alternative causes of action – namely, fraudulent misrepresentation, breach of trust, breach of contract and an "unlawful means conspiracy" with the second defendant. This was denied by the first defendant in their defence, which appears (in the main) to have consisted of non-admissions and bare denials.(2) One of the main averments in the defence alleged that, pursuant to a "portfolio protection" clause in the loan agreement, the first defendant had been entitled to deal with the shares in order to mitigate any loss in value, which they had done on or about 6 September 2019.
The plaintiff applied for an interim payment against the first defendant, pursuant to the Rules of the High Court Order 29, rule 10. For the purposes of the application, the plaintiff only relied on the claims for fraudulent misrepresentation and breach of contract.
There was no real dispute as to the general principles that governed the exercise of the Court's discretion to grant or dismiss the application. In brief:
- The Court had to be satisfied that if the plaintiff's claim proceeded to trial they would succeed and obtain a substantial sum by way of damages.
- The Court also had to be satisfied, on a balance of probabilities, that the defendant had no arguable defence or that the Court would not (by analogy) grant the defendant unconditional permission to defend on an application for summary judgment.
- As regards the amount of any interim payment:
- in the case of a claim for damages, the Court could order such amount as it considered just, not exceeding a reasonable proportion of the damages likely to be recovered by the plaintiff; and
- in the case of a claim for a sum other than damages, the Court could order such amount as it considered just.(3)
In applying these general principles, the Court had a wide discretion and asked whether the plaintiff fulfilled the requirements of the rules as a whole.(4)
The first defendant opposed the plaintiff's application, both on its merits and based on two preliminary objections. The preliminary objections went to the Court's power to order an interim payment. The first defendant argued that:
- First, the Court should be very cautious in determining an application for an interim payment where a claim for fraud is included.
- Second, the plaintiff had claimed different relief based on four different causes of action, some of which were allegedly inconsistent with the claim for damages, and, in the absence of an election by the plaintiff, the Court could not be sure how the other causes of action affected the two grounds on which the plaintiff relied to support their application.
Issues for determination
The Court had to determine the first defendant's preliminary objections and whether to grant the plaintiff's application. If the application was granted, the Court had to determine the amount of the interim payment.
In an interesting and comprehensive judgment, the Court granted the plaintiff's application.
Defendant's preliminary objections
Both preliminary objections were dismissed. First, the plaintiff's claim for breach of contract was a standalone claim and could be considered by the Court without reference to the claim for fraudulent misrepresentation. Second, in the event that the plaintiff pursued a claim at trial for the return of the shares (rather than damages), this should be considered not so much in the context of whether the plaintiff could show that they would obtain substantial damages, but rather as part of the exercise of the Court's discretion regarding the amount of the interim payment.(5) In this regard, the Court concluded:
Thus, I do not see any inconsistency arising from the different causes of action pleaded such as to render the interim payment application uncertain or unworkable.(6)
Merits of plaintiff's application
The Court considered that the first defendant had no arguable defence to the plaintiff's claim based on a breach of contract. The evidence before the Court showed that the plaintiff had not received the loan proceeds and there had been no event of default on their part. In particular, the first defendant's argument that they had been entitled to deal with the shares pursuant to the "portfolio protection" clause in the loan agreement did not stand up to closer scrutiny. No evidence had been put forward by the first defendant as to a risk of loss in the value of the shares on or about 6 September 2019 – indeed, on the contrary, the evidence before the Court showed that the contemporaneous price of the shares had been "on an increasing trend" in the week up to 6 September 2019.(7) The Court found that the first defendant's conduct went beyond the arrangement provided for in the "portfolio protection" clause and resulted in a disposal of the shares in the absence of any event of default on the plaintiff's behalf.(8)
The Court concluded that the plaintiff had shown that they were entitled to an interim payment based on the breach of contract claim and, therefore, the Court did not need to consider the fraudulent misrepresentation claim.
Quantum of interim payment
Having established a strong case on liability for breach of contract, the amount of the interim payment should not exceed "a reasonable proportion of the damages" likely to be recovered by the plaintiff at trial.(9) The starting point for valuing the shares was their value at the time that the plaintiff terminated the loan agreement by giving written notice to the first defendant on 3 November 2019. At that date, the evidence suggested that the value of the shares was approximately HK$72.5 million. Taking a "broad-brush" approach and account of the plaintiff's financial ability to repay in the event of an overpayment, the Court took HK$72.5 million as the basis of an estimate of damages and assessed a reasonable proportion to be 75%.(10) Therefore, the Court ordered the first defendant to make an interim payment of HK$54.4 million within 56 days.
The Court's decision makes for an interesting read and provides a useful example of its exercise of discretion in granting an interim payment in a commercial dispute. An application for an interim payment can be made as an alternative to summary judgment, or it can be part of the same application. Where a Court grants a defendant unconditional permission to defend on a summary judgment application, it is difficult to see how it could grant an interim payment. In passing, it is worth noting that where a Court grants an order for conditional permission to defend, it is usually the case that a defendant makes a payment into court – with an order for interim payment, on the other hand, the payment is usually to the plaintiff as a lump sum.(11)
Of particular note is the comprehensive manner in which the Court appears to have dismissed the first defendant's preliminary objections to the application – in particular, the argument that in the absence of an election by the plaintiff, the different causes of actions pleaded and reliefs claimed somehow cast doubt on whether an interim payment could be granted. This argument does not (in the circumstances) appear to have been a good one.
The case also illustrates the courts' wide exercise of discretion, once procedural objections to the grant of an interim payment application are overcome, and their "broad-brush" approach in determining the amount of an interim payment. In determining a reasonable proportion of the damages likely to be recovered by a plaintiff, a common starting point on an interim payment application is between two-thirds and three-quarters of the estimated damages (after taking into account any contributory negligence, set-off or counterclaim on which a defendant may be entitled to rely).
For further information on this topic, please contact Charles Allen or David Smyth at RPC by telephone (+852 2216 7000) or email ([email protected] or [email protected]). The RPC website can be accessed at www.rpc.co.uk.
Endnotes
(1) [2022] HKCFI 739, 9 March 2022.
(4) Supra note 1, at para 10(c).
(5) Supra note 1, at para 12(b)(iii)(7).
(6) Supra note 1, at para 12(b)(iii)(8).
(7) Supra note 1, at para 13(c)(iv).
(8) Supra note 1, at para 13(c)(vii).
(9) Rules of the High Court, Order 29, rule 11(1) ("Order for interim payment in respect of damages").
(10) Supra note 1, at para 15(f).
(11) Rules of the High Court, Order 29, rule 13 ("Manner of payment").